As we approach the end of a tumultuous year, there is a major disconnect between portfolio growth and the lasting hardship that has been inflicted on the global economy and society as a whole. Year-to-date the MSCI was up 15.78% on Thursday, gold was up 24%, and Bitcoin was up 218%, all as measured in US dollars. Meanwhile the JSE was up 9.04%, and the ALBI up +-9.35%, both as measured in rand.
Although predictions are dangerous, we have used our research to try and identify some of the key factors that could well have a positive influence on financial markets as we progress through 2021: It is likely that vaccine rollouts will contain the spread of Covid-19 in the major developed economies; life will still take some time to return to (a new) normal and consequently the divergence between companies that have been either beneficiaries or casualties of the pandemic will continue; monetary policy is likely to remain supportive in terms of low-interest rates; aggressive tightening of fiscal policy should be unlikely; and in terms of structural shifts, the trend from fossil fuels to renewables will remain intact.
Notwithstanding these points which are broadly supportive of equity as an asset class, we are most cautious about equity market valuations – for example, the S&P is trading on a PE of +-27, versus its long-term average of 17.22. We will therefore continue to position our clients’ portfolios for relative resilience through the application of a defendable, quality-biased, investment philosophy.
In this final Newsletter for 2020, we have included content which has reference to the key influencing factors as mentioned above.
Our first News Flash for 2021 will be distributed on Friday 15 January.
“Those who have knowledge don’t predict. Those who predict, don’t have knowledge.”
– Lao Tzu, an ancient Chinese philosopher and writer
- As was anticipated, the US Food and Drug Administration (FDA) authorised Moderna Inc.’s vaccine for emergency use. Moderna is on track to provide 20 million doses this month, and 85 -100 million doses to the US in the first quarter of next year.
- The European Union (EU) this week approved an additional stimulus package of 1.8 trillion euros. The agreement paves the way for the EU to put into effect not only its seven-year budget but also a 750 billion euro pandemic relief package that will be financed by joint debt.
- Meanwhile, the US continues to battle a stalemate in approving its additional stimulus package. It would however appear, that a $900 billion stimulus deal to provide emergency stimulus payments, jobless aid and rental assistance, extend help to businesses, and fund the distribution of a vaccine, is on the verge of being approved.
- Tensions between China and Australia have been rising since the outbreak of the coronavirus. After months of restrictions, China has officially blocked all coal imports from Australia.
- Bitcoin, the world’s largest cryptocurrency, has reached another milestone in its steep upward trajectory, having surpassed $21 000 for the first time on Wednesday this week.
- Follow this link for an interesting article on what happens to a city’s finances when the top 1% start working remotely. A trend in the US has been that some of the country’s wealthiest people and businesses are moving away from California, Washington, and New York to cities like Austin and Miami.
- Robinhood, a financial app which rose to prominence during lockdowns, has opted to pay a $65 million fine after the Securities and Exchange Commission brought charges against the start-up. The company was accused of misleading its customers about how it was paid by Wall Street firms for passing along their trades and that the app has made money at users’ expense. Robinhood settled the charges without admitting or denying guilt.
- Most of the factors mentioned in our Introduction will also be impactful on the SA investment landscape during 2021. In addition, political developments will continue to play a major role going forward, particularly in terms of how the factional battles within the ANC will unfold in the lead up to the Party’s 2022 Elective Conference. Developments – whether they be positive or negative – will manifest themselves in how matters of corruption, economic reform, service delivery and business confidence are managed.
- South African stocks climbed this week to levels last seen in 2018, with the JSE ALSI currently trading above 60 000. The move was alongside other emerging market indices, buoyed by positive sentiment towards riskier assets. This came as a US stimulus deal seemed to be more likely.
- The rand has also been a beneficiary of global “risk-on” sentiment, with the currency trading at R14.57/USD in late afternoon trade. (The rand intermittently traded at similar levels during 2019). Our research indicates that at these levels, the currency is not pricing in sufficient SA-specific risk: Our debt and fiscal metrics have deteriorated significantly, unemployment has soared, and GDP estimates at 3.5% for 2021 will not even return economy activity to 2019’s level.
- Despite the above point, Bloomberg has published an article on which will be the likeliest winning and losing countries in 2021. South Africa is ranked seventh along with Chile and Turkey out of the 17 developing markets. In first place was Thailand and last placed were China (!) and Brazil – China largely due to high expectations already being accounted for, and Brazil due to fiscal deficit and debt concerns.
- Johnson & Johnson is the first Pharmaceutical company to apply for Covid-19 vaccine registration in SA. Currently, Johnson & Johnson as well as four other coronavirus vaccines are being trialled in the country, including the vaccines developed by Novavax, AstraZeneca, and Pfizer.
- The Integrity Commission has ruled that ANC Secretary-General Ace Magashule must step aside after having been charged with corruption. However, the ANC has subsequently commented that the report did not create a need for urgent action and that further internal processes must follow.
Sources: Dynasty, Reuters, Bloomberg Markets, The New York Times, Daily Maverick, and Moneyweb, Capital Economics etc